Michael Porter Vietnam Compatitiveness

1 Copyright 2007 © Professor Michael E. Porter20081201 – PACE strategy.ppt

Professor Michael E. Porter

Harvard Business School

Ho Chi Minh, Vietnam

December 1, 2008This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive

Advantage (The Free Press, 1985); ―What is Strategy?‖ (Harvard Business Review, Nov/Dec 1996); ―Strategy and the Internet‖ (Harvard Business

Review, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or

by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may

be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 18, 2008, 3pm

Vietnam‟s Competitiveness

and the Role of the Private Sector

http://www.isc.hbs.edu/








The Need For An Economic Strategy

• Vietnam has experienced an impressive growth over the last two

decades

• However, reforms so far are insufficient to move Vietnam to a middle

income economy

• The next several years will determine whether Vietnam will follow the

experience of Korea, or the Philippines

• Vietnam’s reform have been piecemeal and reactive

• Improving Vietnam’s standard of living will require a long term

economic strategy

– A set of interrelated policy changes, institutional structures, and

rigorous implementation mechanisms


Agenda

• Understanding Vietnam‟s Economic Performance

• Assessing Vietnamese Competitiveness

• Identifying Action Priorities

• Organizing for Competitiveness

• Creating an Economic Strategy

• Integrating Corporate Social Responsibility


$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

0% 2% 4% 6% 8% 10% 12%

Prosperity PerformanceSelected Countries

PPP-adjusted GDP

per Capita, 2007

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2003-2007Source: EIU (2008), authors calculations

Ireland

USA

Hungary

China

Taiwan

Greece

Pakistan

Portugal

Switzerland

Czech Republic

Slovakia

Germany Finland

Iceland

Sweden

Spain

UK

Netherlands

Austria

France

Russia

Saudi Arabia

TurkeyThailand

Chile

Singapore

Croatia

Philippines

Slovenia

Bahrain

Canada

Italy

Australia

Japan

Korea

Mexico

New Zealand

Brazil

IndiaIndonesia

Argentina

Hong Kong

Israel

Malaysia

South Africa

Poland

Romania

Lithuania Latvia

Estonia

Colombia Vietnam

Costa Rica

Egypt

Nigeria Bangladesh

Sri Lanka

Cambodia


Source: Economist Intelligence Unit (2008)

Labor Force UtilizationParticipation Rates, Selected Countries

30%

35%

40%

45%

50%

55%

60%

65%

-3% -2% -1% 0% 1% 2% 3% 4% 5% 6%

Labor Force Participation Rate, 2007

Change in Labor Force Participation Rate, 2003-2007

France

UKFinland

Germany

Italy

Latvia

Sweden

Norway

Lithuania

Ireland

South Korea

Czech Rep.

Singapore (6.16%)

Poland

Colombia Mexico

Slovenia

USA

Pakistan

Austria

Morocco

New ZealandJapan

Hungary

Romania

Turkey

Slovakia

Australia

Bulgaria

Canada

Spain

Iceland

Bangladesh

Brazil

Portugal

Indonesia

China

Argentina

Philippines

Russia

Hong Kong

India

Sri Lanka

Nicaragua

Malaysia

Chile

Taiwan

Thailand Vietnam


Comparative Labor ProductivitySelected Countries

Compound annual growth rate (CAGR) of real GDP per employee (PPP-adjusted), 2003-2007

GDP per employee (PPP adjusted US$),

2007

Source: authors calculation Groningen Growth and Development Centre (2008)

France

UK

Argentina

Finland

Germany

Italy

Poland

SwedenNorway

Lithuania

Ireland

South Korea

Czech Republic

Latvia

Hong Kong

Estonia

Mexico

Slovenia

Austria

Switzerland

New Zealand

Japan

HungaryBelarus

TurkeyMalaysia

Slovakia

Australia

China

Canada

Spain

Singapore

USA

IndiaPhilippinesIndonesia

Russia

BrazilSouth Africa

Saudi Arabia

Thailand

ChilePortugal

Iran

TaiwanDenmark

IcelandIsrael

Croatia

Greece

Venezuela

Sri Lanka

Ukraine

Syria

Yemen

Cote d‟Ivoire

Dominican Republic

Ecuador

SenegalKenya Ghana

BangladeshCambodiaEthiopia

Nigeria

Pakistan

EgyptPeruTunisia

Costa Rica Bulgaria

Kazakhstan

Colombia

Vietnam


Decomposition of Vietnamese Growth

Source: Ohno (2008)

Contribution to Annual GDP growth (%)

-2%

0%

2%

4%

6%

8%

10%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Capital Labor TFP


14%

16%

18%

20%

22%

24%

26%

28%

30%

32%

34%

36%

-4% -2% 0% 2% 4% 6% 8% 10% 12%

Domestic Fixed Investment RatesSelected CountriesGross Fixed Investment

as % of GDP (2007)

Note: Includes inbound FDI

Source: EIU, 2008

Change in Gross Fixed Investment (as % of GDP), 2003 - 2007

Turkey

Spain

Czech Republic

Australia

Norway

Slovakia

PakistanAustria

Brazil

Malaysia

France

Germany

Colombia

Netherlands

Poland

Sweden

Latvia

Slovenia

Hungary

USA

ArgentinaDenmark

China (40.4%)

Estonia

UK

Lithuania

South Africa

Philippines

Russia

IndonesiaIreland

Singapore

Korea

India

Iceland

Thailand

Italy

JapanNew Zealand

Canada

Mexico

Kenya

Egypt

Tunisia

Greece

Romania

Sri LankaKazakhstan

Dominican Republic

Finland

Portugal

Hong Kong Chile

Cambodia

Ukraine

Venezuela

Croatia

Saudi Arabia

Vietnam


0%

10%

20%

30%

40%

50%

60%

70%

80%

-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%

Inbound Foreign Investment PerformanceStocks and Flows, Selected Countries

Source: UNCTAD, World Investment Report (2007)

Inward FDI Stocks as % of GDP, Average 2003 - 2007

FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007

Japan

Russia

Saudi

Arabia

Turkey

Slovenia

UK

Hungary

SlovakiaCzech Republic

Australi

a

Denmark

Chile

Netherlands

Poland

USA

Colombia

Estonia

Malaysia

Thailan

dSouth Africa

New Zealand

Indonesia

Iceland (46.7%)

China

Sweden

Canad

aLithuania

Indi

a

Brazil

France

Pakista

n

South Korea

Austria

Latvia

Switzerland

Spain

Italy

Norway

Germany

Mexico

Portugal

Finland

Laos

Cambodia

Philippines

Singapore

(160.1%, 64.7%)

Greece

Israel

Vietnam


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

Export PerformanceSelected CountriesExports as Share of

GDP (in %, 2007)

Change of Exports as Share of GDP, 2003 to 2007

Russia

Thailand Estonia

Hungary

LithuaniaSaudi Arabia

Italy

Latvia

China

TunisiaGermany

Switzerland

Philippines

UK

Canada

France

South Africa

Ireland

USA

India

Norway

Spain

Austria

Brazil

Cambodia

Chile

VenezuelaNew Zealand

Indonesia

Australia

Czech Republic

Slovenia

Slovakia

Turkey

Mexico

South Korea

Pakistan

Argentina

Netherlands

Malaysia (116.4%)

Finland

Ukraine

Sri Lanka

Croatia

Source: EIU (2008), authors‟ analysis

Japan

Portugal

Egypt

Belgium

Kazakhstan

BangladeshColombi

a

Poland

Bulgaria

Dominican Republic

Slovenia

• Imports as a share of GDP are equally high

Vietnam


Vietnam‟s Exports By Type of Industry

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Processed Goods

Semi-processed Goods

Unprocessed Goods

Services

TOTAL

Source: UNComTrade, WTO (2008)

World Export Market Share (current USD)


0%

1%

2%

3%

4%

5%

-0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5%

Vietnam‟s Cluster Export Portfolio2000-2006

Change in Vietnam‟s world export market share, 2000 – 2006Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard

Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the

IMF BOP statistics.

Vie

tna

m‟s

w

orl

d e

xp

ort

ma

rke

t s

ha

re, 2

00

6

Change In Vietnam’s Overall

Growth In World Export Share:

0.25%

Vietnam’s Average World

Export Share: 0.31%

Exports of US$1.1 Billion

=

Footwear (5.68%, 1.91%)

Plastics

Textiles

Appare

l

Fishing and Fishing

Products

Tobacco

Coal & Briquettes

Furnitur

e

0%


Agenda








What is Competitiveness?

• Nations compete to offer the most productive environment for business

• The public and private sectors play different but interrelated roles in creating a productive economy

• Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources.

– Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources)

– It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries

– Productivity in a national economy arises from a combination of domestic and foreign firms

– The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries


Macroeconomic Competitiveness

Microeconomic Competitiveness

Sophistication

of Company

Operations and

Strategy

Quality of the

National

Business

Environment

Macroeconomic

Policies

Social

Infrastructure

and Political

Institutions

State of Cluster

Development

• Macroeconomic competitiveness creates the potential for high productivity, but is

not sufficient

• Productivity ultimately depends on improving the microeconomic capability of

the economy and the sophistication of local competition

Determinants of Competitiveness

Natural Endowments


Wage Level ComparisonSelected CountriesMonthly Minimum Wage

USD, log scale, 2008

Source: Global Competitiveness Report, 2008; EuroStat, 2008; Philippines Department of Labor and Employment,

2008

Global Competitiveness Index Score, 2008

New ZealandAustralia

Taiwan

SingaporeKorea

Malaysia

Cambodia

PhilippinesIndonesia

ThailandChina

Italy

GreeceSlovenia

Portugal

Czech Republic

Estonia

Spain

Cyprus

Lithuania

Austria

Sweden

Netherlands

DenmarkIreland

United Kingdom

Japan / Belgium / France

Germany

Hungary Poland Slovakia

LatviaRomania

Bulgaria

$0

$1,000

$3,000

$500

$100

$50

Vietnam


BCI Value, 2007

Dynamism Score, 2002 - 2007

Below average Above averageAverage

Zambia Zimbabwe

Uganda

Tanzania Honduras

Indonesia

Sri Lanka

Bolivia

Mali

Pakistan

Nicaragua

India

Bangladesh

Rate of Competitiveness ImprovementLow Income Countries, 2002 - 2007

Paraguay

El Salvador

Chad

Mozambique

Madagascar

Nigeria Gambia

Ethiopia

Source: Global Competitiveness Report 2007

High

Low

Vietnam


Macroeconomic Competitiveness

• Basic human capacity– Basic education

– Health system

• Political institutions– Political freedom

– Voice and accountability

– Political stability

– Centralization of economic policymaking

– Government effectiveness

• Rule of law– Judicial independence

– Efficiency of legal framework

– Civil rights

– Business costs of corruption

– Reliability of police

– Prevalence and costs of crime

• Fiscal policy– Government surplus/deficit

– Government debt

– Savings / Investment rates

• Monetary policy– Inflation

– Interest rate spread

Social Infrastructure and

Political Institutions

Macroeconomic

Policies


Macroeconomic CompetitivenessVietnam‟s Position

Social Infrastructure and

Political Institutions

Macroeconomic

Policies

Basic health and education

+ Solid provision of basic services

– Increasing concerns about the quality of these

public services

Fiscal policy

+ Government budget and debt at acceptable

levels

– Government budget still reliant on foreign aid

Monetary Policy

– High levels of inflation

Political institutions

+ High levels of political stability

+ Increasing decentralization of economic

policy responsibilities

– Little effective policy dialogue

– Corruption remains a significant challenge

Rule of law

+ Quality of laws tends to be good

– Effectiveness of implementation remains

weak


Singa

pore

Japa

n

Sou

th K

orea

Taiwan

Mal

aysia

Bra

zil

Indi

a

Thaila

nd

Sri

Lank

a

Philip

pine

s

Indo

nesia

China

Vietn

am

Rus

sia

Cam

bodia

Ban

glad

esh

Laos

Pak

ista

n

Voice and Accountability

Political Stability

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

Governance IndicatorsSelected Countries

Note: Sorted left to right by decreasing average value across all indicators. The „zero‟ horizontal line corresponds to the median country‟s average value across all

indicators.

Source: World Bank (2008)

Worstcountry in the world

Index of Governance

Quality,2007

Best country in the world


-20 -15 -10 -5 0 5 10 15 20

Corruption Perception Index, 2007

Note: Ranks only countries available in both years (91 countries total)

Source: Global Corruption Report, 2007

Change in Rank, Global Corruption Report, 2007 versus 2001

Rank in

Global

Corruption

Index,

2007

91

1

ImprovingDeteriorating

High

corruption

Low

corruption

Finland

Canada

Bangladesh

Indonesia

Ireland

Portugal

Egypt

Iceland

Czech Republic

Slovakia

South Korea

Latvia

India

Slovenia

Thailand

Switzerland

France

Romania

Turkey

Estonia

Austria GermanyJapan

China

NorwayUK

Malaysia

Lithuania

Colombia

HungaryTaiwan

Spain

Hong Kong

ChileUnited States

South Africa

Mexico

Croatia

Italy

Poland

Brazil

Argentina

Israel

Venezuela

Russia

Uruguay

New ZealandSweden

Tunisia

Peru

Tanzania

Uganda

Senegal

Philippines

ZimbabweCote d‟Ivoire

Nigeria

Pakistan

GreeceJordan

Ukraine

Panama

Vietnam


Access to high quality

business inputs– Human resources

– Capital availability

– Physical infrastructure

– Administrative infrastructure

(e.g. registration, permitting)

– Information and transparency

– Scientific and technological

infrastructure

Microeconomic Competitiveness: Quality of the

Business EnvironmentContext for

Firm Strategy

and Rivalry

Related and Supporting Industries

Factor(Input)

Conditions

Demand Conditions

Availability of suppliers and

supporting industries

Sophistication of local

customers and needs

–e.g., strict quality, safety,

and environmental

standards

• Many things matter for competitiveness

• Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing

Local rules and incentives that

encourage investment and

productivity– e.g. incentives for capital

investments, intellectual property

protection

Vigorous local competition– Openness to foreign and local

competition


• Communications infrastructure

(rank 72)

– E.g., quality of the telephone

infrastructure

• Local competition (rank 75)

– E.g., intensity of local

competition

• Government intervention (rank 119)

– E.g., SOE market dominance

• Trade barriers (rank 113)

– E.g., level of import tariffs

Competitive Disadvantages Competitive Advantages

Vietnamese Business EnvironmentVietnam‟s Relative Position 2008

Note: Rank versus 130 countries; overall, Vietnam ranks 102nd in 2008 PPP adjusted GDP per capita and 76th in New Global Competitiveness

Source: Institute for Strategy and Competitiveness, Harvard University (2008)


0

20

40

60

80

100

120

140

160

Hong K

ong

Sin

gapore

Unite

d S

tate

s

Taiw

an

Germ

any

New

Zeala

nd

Japan

Phili

ppin

es

Mala

ysia

Thaila

nd

Indonesia

Bra

zil

Chin

a

Sri L

anka

South

Kore

a

Pakis

tan

Vie

tnam

Laos

Cam

bodia

India

Russia

Openness to TradeSelected Countries, 2008Rank (157

countries)

Source: Index of Economic Freedom (2008), Heritage Foundation

• Vietnam’s lack of openness will retard further competitiveness upgrading

Vietnam


• Communications infrastructure

(rank 72)

– E.g., quality of the telephone

infrastructure

• Local competition (rank 75)

– E.g., intensity of local

competition

• Government intervention (rank 119)

– E.g., SOE market dominance

• Trade barriers (rank 113)

– E.g., level of import tariffs

• Energy infrastructure (rank 109)

– E.g., quality of electricity supply

• Access to finance (rank 109)

– E.g., financial market sophistication

• Innovation infrastructure (rank 99)

– E.g., patents per capita

• Logistical infrastructure (rank 96)

– E.g., quality of roads

Competitive Disadvantages Competitive Advantages

Vietnamese Business EnvironmentVietnam‟s Relative Position 2008

Note: Rank versus 130 countries; overall, Vietnam ranks 102nd in 2008 PPP adjusted GDP per capita and 76th in New Global Competitiveness

Source: Institute for Strategy and Competitiveness, Harvard University (2008)


Cost of Doing BusinessVietnam, 2008Ranking, 2008

(of 181 countries)

Source: World Bank Report, Doing Business (2008)

Favorable Unfavorable

Vietnam’s per capita GDP rank: 70th

Median Ranking, East Asia and Pacific

• Especially in land ownership in rural areas significant problems remain


State-Owned Enterprises (SOEs) in Vietnam

• SOEs continue to play a dominant role in the Vietnamese economy,

despite the commitment to privatization

• Government oversight of these companies and their spending is

limited and largely reactive

• The costs of slow progress on privatization are high for Vietnam’s

competitiveness

– Retards entry of new private companies

– Creates risks of corruption

– Can exacerbate economic volatility through excessive investment

financed through soft credit

• An effective privatization program strategy for Vietnam must shift

economic structure, not just change ownership

– Privatization must go hand-in-hand with market opening and policies to

curtail anti-competitive practices

– Owners are needed that contribute new capital and skills

– Minority stakes can distribute ownership more widely


Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

Hotels

Attractions and

Activitiese.g., theme parks,

casinos, sports

Airlines,

Cruise Ships

Travel agents Tour operators

Restaurants

Property

Services

Maintenance

Services

Government agenciese.g. Australian Tourism Commission,

Great Barrier Reef Authority

Educational Institutionse.g. James Cook University,

Cairns College of TAFE

Industry Groupse.g. Queensland Tourism

Industry Council

Food

Suppliers

Public Relations &

Market Research

Services

Local retail,

health care, and

other services

Souvenirs,

Duty Free

Banks,

Foreign

Exchange

Local

Transportation

State of Cluster DevelopmentTourism Cluster in Cairns, Australia


0%

1%

2%

3%

4%

5%

-0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5%

Vietnam‟s Cluster Export Portfolio2000-2006



IMF BOP statistics.

Vie

tna

m‟s

w

orl

d e

xp

ort

ma

rke

t s

ha

re, 2

00

6


Growth In World Export Share:

0.25%

Vietnam’s Average World

Export Share: 0.31%


=

Footwear (5.68%, 1.91%)

Plastics

Textiles

Appare

l

Fishing and Fishing

Products

Tobacco

Coal & Briquettes

Furnitur

e

0%


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

-0.10% -0.05% 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30%

Vietnam‟s Cluster Export Portfolio cont‟d2000-2006



IMF BOP statistics.

Vie

tna

m‟s

w

orl

d e

xp

ort

ma

rke

t s

ha

re, 2

00

6

AutomotiveProduction Technology

Motor Driven

Products

Information

Technology

Textiles

Prefabricated Enclosures and Structures

Leather and Related Products

Analytical InstrumentsJewelry, Precious Metals and

Collectibles

Communications Equipment

Oil & Gas

Agricultural Products

Biopharmaceuticals

Processed Foods

Chemical Products

Forest Products

Total

Services

Power and Power Generation Equipment

Construction Materials

Lighting and Electrical Equipment

Medical Devices

Publishing and Printing

Metal Mining and Manufacturing

Entertainment

Building Fixtures and Equipment

Sporting, Recreational

and Children's Goods


=


Growth in World Export Share:

0.25%

Vietnam’s Average

World Export

Share: 0.31%


FurnitureBuilding

Fixtures,

Equipment &

Services

Fishing &

Fishing

Products

Hospitality

& TourismAgricultural

ProductsTransportation

& Logistics

Share of World Exports by ClusterVietnam, 2000

Plastics

Oil &

Gas

Chemical

Products

Biopharma-

ceuticals

Power

Generation

Aerospace

Vehicles &

Defense

Lightning &

Electrical

Equipment

Financial

ServicesPublishing

& Printing

Entertainment

Information

Tech.

Communi-

cations

Equipment

Business

Services

Distribution

Services

Forest

Products

Heavy

Construction

Services

Construction

Materials

Prefabricated

Enclosures

Apparel

Leather &

Related

Products

Jewelry &

Precious

Metals

Textiles

Footwear

Processed

Food

Tobacco

Medical

Devices

Analytical

InstrumentsEducation &

Knowledge

Creation

Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both

directions.

Marine

Equipment

Aerospace

Engines

Heavy

Machinery

Sporting

& Recreation

Goods

Automotive

Production

Technology

Motor Driven

Products

Metal

Manufacturing

< 0.07%

0.07 – 0.15%

0.16 – 0.31%

0.31 – 0.62%

0.62- 1.24%

Not reported

> 1.24%


FurnitureBuilding

Fixtures,

Equipment &

Services

Fishing &

Fishing

Products

Hospitality

& TourismAgricultural

ProductsTransportation

& Logistics

Share of World Exports by ClusterVietnam, 2006

Plastics

Oil &

Gas

Chemical

Products

Biopharma-

ceuticals

Power

Generation

Aerospace

Vehicles &

Defense

Lightning &

Electrical

Equipment

Financial

ServicesPublishing

& Printing

Entertainment

Information

Tech.

Communi-

cations

Equipment

Business

Services

Distribution

Services

Forest

Products

Heavy

Construction

Services

Construction

Materials

Prefabricated

Enclosures

Apparel

Leather &

Related

Products

Jewelry &

Precious

Metals

Textiles

Footwear

Processed

Food

Tobacco

Medical

Devices

Analytical

InstrumentsEducation &

Knowledge

Creation

Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both

directions.

Marine

Equipment

Aerospace

Engines

Heavy

Machinery

Sporting

& Recreation

Goods

Automotive

Production

Technology

Motor Driven

Products

Metal

Manufacturing

< 0.07%

0.07 – 0.15%

0.16 – 0.31%

0.31 – 0.62%

0.62- 1.24%

Not reported

> 1.24%


Geographic Levels and Competitiveness

Broad Economic Areas

Groups of

Neighboring Nations

States, Provinces

Metropolitan and Rural Areas

Nations

World Economy

Asia

Southeast Asia

Vietnam

Vietnamese provinces

Ho Chi Minh City

WTO

• The business environment at a given

location is the cumulative outcome of

policy at all geographic levels

• Many competitiveness drivers occur

at the regional and local level

• The allocation of competitiveness

responsibilities across geographic

levels is a crucial policy challenge


Specialization of Regional EconomiesSelected U.S. Geographic Areas

Boston

Analytical Instruments

Education and Knowledge Creation


Los Angeles Area

Apparel

Building Fixtures,

Equipment and

Services

Entertainment

Chicago


Processed Food

Heavy Machinery

Denver, CO

Leather and Sporting Goods

Oil and Gas

Aerospace Vehicles and Defense

San Diego

Leather and Sporting Goods

Power Generation

Education and Knowledge

Creation

San Francisco-

Oakland-San Jose

Bay Area

Communications

Equipment

Agricultural

Products

Information

Technology

Seattle-Bellevue-

Everett, WA

Aerospace Vehicles and

Defense

Fishing and Fishing

Products

Analytical Instruments

Houston

Oil and Gas Products and Services

Chemical Products

Heavy Construction Services

Pittsburgh, PA


Metal Manufacturing

Education and Knowledge

Creation

Atlanta, GA


Transportation and Logistics

Business Services

Raleigh-Durham, NC


Information Technology

Education and

Knowledge Creation

Wichita, KS

Aerospace Vehicles and

Defense

Heavy Machinery

Oil and Gas

Note: Clusters listed are the three highest ranking clusters in terms of share of national employment.

Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School, 11/2006.


Vietnam Provincial Competitiveness Index, 2006

Excellent

High Performing

Mid-high

Average

Mid-low

Low Performing

Source: Vietnam Provincial Competitiveness Index 2006 (USAID)


The NeighborhoodSoutheast Asia

• Vietnam has a central position between ASEAN and China


• Eliminating

trade and

investment

barriers within

the region

• Simplifying and

harmonizing

cross-border

regulations and

paperwork

• Coordinating

anti-

monopoly and

fair

competition

policies

• Harmonizing

environmental

standards

• Harmonizing

product safety

standards

• Establishing

reciprocal

consumer

protection laws

• Opening

government

procurement

within the region

• Improving regional

transportation

infrastructure

• Creating an efficient

energy network

• Enhancing regional

communications

and connectivity

• Linking financial

markets

• Opening the

movement of

students for higher

education

• Harmonizing

administrative

requirements for

businesses

• Facilitating cross-

border cluster

upgrading, e.g.

– Tourism

– Agribusiness

– Transport &

Logistics

– Business

services

• Creating a

regional marketing

program

• Sharing best

practices in

government

operations

• Creating regional

institutions– Dispute

resolution mechanisms

– Regional development bank

• Developing a

regional

negotiating

position with

international

organizations

Factor

(Input)

Conditions

Regional

Strategy &

Governance

Context for

Strategy

and Rivalry

Related and

Supporting

Industries

Demand

Conditions

Economic Coordination Among NeighborsEnhancing Productivity

Macroeconomic

Competitiveness

• Coordinating

programs to

improve public

safety

• Coordinating

macro-economic

policies


Agenda








Stages of National Competitive DevelopmentShifting Policy Imperatives

Factor-Driven

Economy

Investment-

Driven Economy

Innovation-

Driven Economy

Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990

Low Cost Inputs Productivity Unique Value

• Macro, political, and legal

stability

• Efficient basic

infrastructure

• Lowering regulatory costs

of doing business

• Increasing local competition

• Market openness

• Advanced infrastructure

• Incentives and rules

encouraging productivity

• Cluster formation and

activation

• Advanced skills

• Scientific and technological

institutions

• Incentives and rules

encouraging innovation

• Cluster upgrading


Competitiveness Action Agenda: Key Priorities

• Reduce corruption

• Improve infrastructure

• Deepen financial market

reforms

• Impose regulatory

attractiveness

Fundamental ReformContinue Existing Efforts

• Human resource

development at all levels

• Reform of SOEs

• Cluster development


Reducing Corruption

• The government has repeatedly committed itself towards reducing

corruption; and some action has been taken

• Evidence reveals little progress

• Vietnam needs to target corruption as a crucial barrier for growth and

design an integrated strategy to tackle its occurrence

Action priorities

• Reduce the potential for corruption through simplified regulations, use

of modern information technology, and improved SOE governance/

privatization

• Set clear guidelines and reporting requirements for management of

SOEs

• Demonstrate a commitment for transparency, including support for a

strong press


Improving Infrastructure

• Significant infrastructure investments have been made in recent

years

• Evidence on their impact is mixed as best. There is significant

duplication of efforts and companies complain about serious

bottlenecks

• Vietnam needs to better target infrastructure investments to meet

the needs of its growing economy

Action priorities

• Establish a national fund for key infrastructure projects to be

implemented under the supervision of the Prime Minister’s office

• Utilize matching funds incentives to improve effectiveness if

investments by provincial governments

• Create a public-private council to advise on spending priorities


Deepening Financial Markets

• Vietnam has made clear progress on opening up financial markets,

more recently also to foreign companies as part of the WTO agreement

• But the weakness of Vietnam’s financial markets even before the

global crisis, and the financing constraints faced by private

companies, indicate that serious challenges remain

• Vietnam needs to develop a modern regulatory and institutional

structure to enable an effective financial system

Action priorities

• Continue opening financial markets in line with WTO commitments

• Create an effective, independent financial regulator, using outside

help as needed

• Establish a development bank to develop financing tools for private

SMEs


Regulatory Reform

• Regulatory reform has been on the Vietnamese policy agenda for

some time, especially over the last five years

• Despite some progress, the overall regulatory burden on businesses

and citizens remains high with no clear societal benefits

• Vietnam needs a fundamentally new approach to regulatory reform

and assessment of new regulations

Action priorities

• Aggressively pursue the work on regulatory reform initiated with

foreign donors

• Improve institutional capacity to evaluate and administer regulations,

not just the rules themselves

• Include an obligatory assessment of the administrative burden on

business in the process of introducing new laws and regulations


Human Resource Development

Basic

education

Vocational

training

Higher

education

• Enrolment rates have increased significantly but quality is low and

skills fail to meet company needs

• Vietnam needs to dramatically improve educational quality, through

setting standards, improving curricula, and involving the private

sector in governance

• Vietnam lacks a skills training system

• Companies have launched own training efforts to address skill

bottlenecks

• Vietnam needs a clear program for cluster-based workforce

development

• The number of universities has increased but quality is low and skills

do not match company needs

• Higher university education standards must be set and enforced,

drawing on international experts

• Vietnam needs to develop a plan and enabling institutions for

assimilation of global technology


Restructuring of State Owned Enterprises

• The government has an explicit policy to promote private enterprise but there is

deep-seated ambivalence towards privatization

• Without a thorough reform of the SOE sector, there is little hope for Vietnam to

reach the next level of economic development

• The creation of SOE groups is not a solution and can exacerbate problems if

no other reforms are being implemented

SOE

governance

Competition in

markets with

SOEs

Privatization

• Create independent boards of directors

• Implement transparent financial reporting

• Define clear financial objectives

– Set corporate charters

• Remove existing trade, investment, and artificial entry barriers

protecting SOEs

• Establish strong, independent regulatory bodies

• Support start-ups and spin-offs from SOEs

• Create clear legal conditions for privatization

• Define explicit objectives for privatization process

• Create a dedicated structure for implementing privatization


Cluster Development in Vietnam

• Vietnam’s clusters currently tend to be narrowly focused on

individual products

• There is limited collaboration among companies, suppliers and other

institutions

– Some clusters, like coffee, have the potential to significantly increase their

performance if they adopt a collaboration approach

• Cluster-based development thinking is crucial in improving the delivery

of other economic policies

– Workforce skill development around clusters

– FDI attraction/industrial zones around clusters

– Cluster-based regional development initiatives

– Quality and technology transfer organization for each cluster

• Policy should upgrade all existing and emerging clusters, not choose

among them


Clusters and Economic Policy

Clusters

Physical

Infrastructure

Natural Resource

Protection

Environmental

Stewardship

Science and Technology

Investments

(e.g., centers, university

departments,

technology transfer)

Education and

Workforce Training

FDI/Business Attraction

Export Promotion

• Clusters provide a framework for implementing public policy and

organizing public-private collaboration to enhance competitiveness

Standard setting and

quality initiatives

Market Information

and Disclosure

Management Training

Industrial parks and

free trade zones


Turn Niche Products Into

Clusters

Develop Related Clusters

Clusters and Economic Diversification

Deepen Existing ClustersBuild Clusters Around

MNCs

Upgrade Existing Export

Products and Services


Upgrading Vietnamese Niche Positions, 2006

Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business

School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database.

ClusterCluster World

Export ShareSubcluster Industry

Industry

Share of

World

Exports

Change in

Share (1997-

2006)

Export Value (in

$thousands)

Rubber Natural rubber, balata and similar natural gums 7.82% 3.40% 1,137,205$

Plastic Waste Reclaimed unhardened rubber; waste 1.88% 1.87% 6,084$

Plastic Products Plastic sacks, bags 1.55% 0.65% 150,234$

Rubber Synthetic rubber 1.13% 1.13% 143,316$

Motorcycles and Bicycles Parts of other motorcycles 1.42% 1.22% 60,962$

Motorcycles and Bicycles Bicycles and other cycles, non-motorized 1.27% -1.56% 49,628$

Specialty Office Machines Parts for calculating, accounting machines 23.04% 23.04% 444,384$

Electrical and Electronic Components Insulted wire, cable and conductors 1.07% 0.72% 705,725$

Specialty Foods and Ingredients Starches, inulin and gluten 7.93% 6.23% 148,445$

Food Products Machinery Distilling, rectifying plant 2.64% 2.64% 19,449$

Specialty Foods and Ingredients Vegetable saps, extracts 0.90% 0.50% 9,193$

Dairy and Related Products Milk, concentrated or sweetened 0.84% -0.22% 89,315$

Specialty Foods and Ingredients Yeasts 0.81% 0.27% 7,962$

Specialty Foods and Ingredients Homogenized food preparations 0.76% 0.59% 4,888$

Glass Drawn, float, cast glass, worked 6.39% 6.37% 78,185$

Electrical Parts Other inductors 3.20% 2.86% 137,477$

Electrical Parts Other electric transformers 1.17% 0.68% 63,386$

Motors and Generators Electric motors<=37.5w 1.88% 1.15% 150,425$

Appliances Sewing machines and parts 1.21% 0.26% 45,749$

Audio Equipment Loudspeakers, unmounted 1.41% 1.40% 39,964$

Audio Equipment Electric sound amplifiers 1.07% 1.07% 8,745$

Peripherals Input or output units 1.01% 1.01% 653,740$

Electronic Components and Assemblies Printed circuits 0.36% -0.43% 85,738$

Electronic Components TV picture tubes, CRTs 1.26% 1.23% 53,690$

Electronic Components Other electronic valves, tubes 0.35% -0.50% 12,186$

Process Instruments Gas meters 0.34% 0.34% 1,415$

Fabricated Plate Work Steam generating boilers, super-heated water boilers; and parts1.35% 1.35% 53,010$

Process Equipment Components Articulated link chain and parts 0.45% 0.31% 7,292$

Machine Tools and Accessories Cutting blades for machines 0.42% 0.38% 7,501$

Production

Technology0.046%

Plastics

Sporting,

Recreational and

Children's Goods

Information

Technology0.121%

Motor Driven

Products

0.284%Communications

Equipment

Analytical

Instruments0.047%

Entertainment and

Reproduction

Equipment

0.490%

0.361%

0.260%

0.256%

0.156%

0.125%

Processed Food

Lighting and

Electrical Equipment


Agenda








The Process of Economic DevelopmentShifting Roles and Responsibilities

Old Model

• Government drives economic

development through policy

decisions and incentives

New Model

• Economic development is a

collaborative process involving

government at multiple levels,

companies, teaching and

research institutions, and

institutions for collaboration

• Competitiveness must become a bottoms-up process in which many individuals,

companies, and institutions take responsibility

• Every community and cluster can take steps to enhance competitiveness


Government and the Process of Economic Development

• Competitiveness is affected by a myriad of government entities

– Multiple agencies and departments (e.g. finance, trade, education, science

and technology, commerce, regional policy, energy, agriculture)

– Multiple levels of government (nations, states, cities, etc.)

– Intergovernmental relations with neighboring countries affect

competitiveness

• Competitiveness is rarely the sole agenda of any government agency

• Coordinating structures are needed that brings together the ministries

and departments necessary to formulate and implement an economic

strategy

• Explicit mechanisms are needed to engage the private sector in dialog

about policy priorities and implementation progress


Organizing for Competitiveness in VietnamRecommendations

• Create effective, independent regulatory organizations

• Improve economic policy at the provincial level

• Improve mechanisms for public-private discussion and collaboration

• Enhance strategic planning and program management capacity in

the central and provincial governments

• Develop a national economic strategy process to guide priorities in

improving the business environment


Regional Development in Vietnam

• Vietnam’s provinces are developing at different rates; prosperity levels

between the richest and poorest regions differs greatly

• Political power and responsibility for economic development has been

decentralized to the provinces, who apply to the national government for funds

• Provinces have adopted unfocused growth strategies with much duplication

and little specialization across provinces

• Provinces have insufficient technical capacity for policy design and

implementation

• Each province should be charged with developing an economic plan based on

its unique strengths and potential

• Each province should be expected to publicly report on implementation


Competitiveness Institutions

• Economic strategy unit in the Prime Minister’s office

– Regularly updating on progress

– Lead a formal planning and program management process involving all

agencies

• Public-private competitiveness council

• Vietnam Competitiveness Institute

– To conduct analyses, benchmark vs. other countries, and train

government leaders

– Joint national and provincial

• Enhanced role of business associations


Agenda








National Value Proposition

Defining an Economic Strategy

Developing Unique StrengthsAchieving and Maintaining Parity

with Peers

• What elements of context and the

business environment are crucial

priorities?

• What existing and emerging clusters

should be developed first?

• What weaknesses must be addressed to

achieve parity with peer countries?

• What is the unique competitive position of the nation or

region given its location, legacy, and existing and potential

strengths?

– What roles with neighbors, the region, and the broader world?

– What unique value as a business location?

– For what types of activities and clusters?

• Priorities and sequencing are a necessity in economic development


The Need for an Economic Strategy

• The Vietnamese government follows largely an evolutionary and

reactive approach in response to crises and specific problems

• Foreign aid inflows are fragmented and driven by donor-priorities

• This approach has been successful in achieving success in factor-

based economic development, but will be insufficient to move to a

new stage

• Government needs leads in a broad-based discussion on a new

economic strategy that sets priorities for improvements in the

business environment and institutions

– Internally, the government needs to increase its technical capacity to

support such a strategic dialogue, for example through a strategy unit in

the Prime Minister‟s office


Agenda

• Understanding Vietnam’s Economic Performance







Implications for Companies

• A company’s competitive advantage depends partly on the quality of the business

environment

• A company gains advantages from being part of a cluster

• Companies have a strong role to play in upgrading their business environment

• Take an active role in upgrading the local infrastructure

• Nurture local suppliers and attract foreign suppliers

• Work closely with local educational and research institutions, to upgrade their

quality and create specialized programs addressing the cluster‟s needs

• Inform government on regulatory issues and constraints bearing on cluster

development

• Focus corporate philanthropy on enhancing the local business environment

• An important role for trade associations

– Greater influence if many companies are united

– Cost sharing between members


Corporate Social Responsibility A Growing Agenda

• External pressures for CSR continue to grow

• Numerous organizations monitor, rank, and report social

performance

• The legal and business risks are great for companies engaging in

practices deemed unacceptable

• CSR is increasingly important to business leaders, yet the concept

and its justifications remain unclear

• Few companies have integrated society into strategy in a way that

reinforces competitive advantage for the business


• There is an inevitable link between a business and society

• The health of a society depends on having competitive companies that can create

wealth and support high wages

• The competitiveness of companies depends on the surrounding community

− E.g., educated and skilled employees

− Safe working conditions

− A transparent, corruption-free business environment

− A sense of equal opportunity

− Low levels of environmental degradation (productive use of physical resources)

• Companies can positively affect many social issues

• There is a long-term synergy between economic and social objectives

• To maximize this synergy, business decisions and social policies must follow the

principle of shared value

– Company competitiveness and social conditions must benefit simultaneously

Integrating Strategy and Society

Economic

Objectives

Social

Objectives


The Role of Business in Social Issues

• Business cannot solve all of society’s problems, nor bear the cost of

doing so

– There are many worthy causes

• Business must approach its social agenda proactively and

strategically

• Business must address society and social issues where it can add the

most value

• Where is a company able to have the greatest impact on social issues

versus other institutions?

Social Benefits

Resources ExpendedSocial Value =


Inside-Out Links with SocietyValue Chain Social Impacts

Inbound

Logistics(e.g. Incoming

Material

Storage, Data

Collection,

Service,

Customer

Access)

Operations

(e.g. Assembly,

Component

Fabrication,

Branch

Operations)

Outbound

Logistics

(e.g. Order

Processing,

Warehousing,

Report

Preparation)

Marketing

& Sales

(e.g. Sales Force,

Promotion,

Advertising,

Proposal

Writing, Web

site)

After-Sales

Service

(e.g. Installation,

Customer

Support,

Complaint

Resolution,

Repair)

M

a

rg

i

n

Primary Activities

Support

Activities

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Procurement(e.g. Components, Machinery, Advertising, Services)

Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

Value

What

buyers are

willing to

payInbound


Material

Storage, Data

Collection,

Service,

Customer

Access)

Operations

(e.g. Assembly,

Component

Fabrication,

Branch

Operations)

Outbound

Logistics

(e.g. Order

Processing,

Warehousing,

Report

Preparation)

Marketing

& Sales

(e.g. Sales Force,

Promotion,

Advertising,

Proposal

Writing, Web

site)

After-Sales

Service

(e.g. Installation,

Customer

Support,

Complaint

Resolution,

Repair)

M

a

rg

i

n

Primary Activities

Support

Activities





Inbound


Material

Storage, Data

Collection,

Service,

Customer

Access)

Operations

(e.g. Assembly,

Component

Fabrication,

Branch

Operations)

Outbound

Logistics

(e.g. Order

Processing,

Warehousing,

Report

Preparation)

Marketing

& Sales

(e.g. Sales Force,

Promotion,

Advertising,

Proposal

Writing, Web

site)

After-Sales

Service

(e.g. Installation,

Customer

Support,

Complaint

Resolution,

Repair)

M

a

rg

i

n

Primary Activities

Support

Activities

Support

Activities





Value

What

buyers are

willing to

pay

• Financial reporting practices

• Governance practices

• Transparency

• Use of lobbying

• Relationships with universities

• Ethical research practices

(e.g. animal testing, GMOs)

• Product safety

• Procurement practices

(e.g. bribery, child labor,

conflict diamonds, pricing to

farmers)

• Use of particular inputs

(e.g. animal fur)

• Conservation of raw materials

• Recycling

• Transportation impacts

(e.g. emissions, congestion,

logging roads)

• Emissions and waste

• Biodiversity and ecological

impacts

• Energy and water use

• Worker safety and labor

relations

• Hazardous materials

• Packaging use and

disposal

(e.g. McDonald’s clamshell)

• Transportation impacts

• Employee education and job

training

• Safe working conditions

• Diversity and discrimination

• Health care and other benefits

• Compensation policies

• Layoff policies

• Disposal of obsolete products

• Handling of consumables

(e.g. motor oil, printing ink

• Customer privacy

• Marketing and advertising (e.g. truthful

advertising, advertising to children)

• Pricing practices (e.g. price

discrimination among customers,

anticompetitive pricing practices, pricing

policy to the poor)

• Consumer information

• Every activity in the value chain touches on communities in the locations where a

company operates. These impacts can be positive or negative.


Identifying Shared ValueOutside-In Social Impact on the Company

Source: Michael Porter, The Competitive Advantage of Nations, 1990

• Competitive context is often influenced by or inextricably linked with social conditions

• Availability of qualified human resources

(Marriott’s job training)

• Access to specialized training programs

• Efficient physical infrastructure

• Efficient permitting and regulatory practices

• Availability of scientific and technological

institutions (Microsoft’s Working Connections;

Nestlé’s knowledge transfer to farmers)

• Sustainable access to natural resources

(GrupoNueva’s water conservation)

• Efficient access to capital

• Fair and open local competition (e.g., the

absence of trade barriers, fair regulations)

• Intellectual property protection

• Transparency (e.g., financial reporting,

corruption: Extractive Industries

Transparency Initiative)

• Rule of law (e.g., security, protection of

property, legal system)

• Meritocratic incentive systems (e.g.,

antidiscrimination)

• Nature of local demand (e.g. appeal of

social value propositions: Whole Foods’

customers)

• Fair and demanding regulatory

standards (California auto emissions &

mileage standards)

• Local needs that can be served

nationally and globally (Urbi’s housing

financing, Unilever’s ―bottom of the

pyramid‖ strategy)

• Availability of local suppliers and support

services (Sysco’s locally grown produce;

Nestlé’s milk collection dairies)

• Access to partner firms in related fields

• Access to a cluster instead of isolated

firms and industries

Context for Firm Strategy and Rivalry

Related and Supporting Industries

Factor(Input)

Conditions

Demand Conditions


Creating a Corporate Social Agenda

Generic

Social Impacts

Value Chain Social

Impacts

Social Dimensions

of Competitive

Context

• Good citizenship • Mitigate harm from

value chain activities

Responsive CSR Strategic CSR

• Transform value chain

activities to benefit

society while

reinforcing strategy

• Strategic philanthropy

that improves salient

areas of competitive

context

• The impact of CSR is greatest when responsive CSR, value chain social

impacts, and investments in competitive context are integrated

• Create a social

dimension of the value

proposition


Strategic CSR: ChoicePoint

• ChoicePoint’s core business is providing personal identification, screening, and credit verification

– e.g., employment background screening, credit verification, DNA identification, drug testing

• The company’s CSR program focuses on providing identification and verification services and advice to social organizations:

– e.g., background checks of volunteers working with children

– Identity verification for disaster victims

– Assisting NGOs to find missing children and prevent identity theft

• ChoicePoint’s CSR is aligned with its founding principle: creating a safer and more secure society through responsible use of information

• ChoicePoint leverages its skills, data, technological knowledge, and staff to maximize social benefit

• CSR activities are not just charity but improve the company‟scapabilities around identity issues


Strategic CSR: Nestlé in India

• Nestlé’s entered the poor Moga region of India in 1962

• Local milk supply was hampered by small parcels of land, poor soil, periodic

droughts, animal disease, and lack of a commercial market

• Nestlé established local milk purchasing organizations in each town

• Nestlé invested in improving competitive context

– Collection infrastructure such as refrigerated dairies was accompanied by

veterinarians, nutritionists, agronomists, and quality assurance experts to assist

small farmers

– Medicines and nutritional supplements were provided to improve animal health

– Monthly training sessions were held for local farmers

– Wells to secure water supply for animals were dug with financing and technical

assistance from Nestlé

• Nestlé has built a productive milk cluster in Moga, buying milk from more than

75,000 farmers through 650 local dairies

• Moga has dramatically improved social conditions

• Nestlé has developed a long-term competitive advantage in the milk cluster


The Moral Purpose of Business

• The most important thing a corporation can do for society is to contribute to a prosperous economy

• Only business can create wealth; other institutions in society are principally involved in redistributing wealth or investing it to meet human needs

• Business has the tools, capabilities, and resources to make a far greater positive impact on social issues than most other institutions

• Corporations depend on a healthy society to sustain competitiveness

• Business is more transparent and more accountable than most foundations and NGOs

• Corporations are not responsible for all the world‟s problems, nor do they have the resources to solve them all

– Business has no need to be defensive about its role in society

• Each company can and should identify the particular set of societal problems that it is best equipped to help resolve, and from which it can gain the greatest competitive benefit

• Addressing social issues through shared value strategies will lead to self-sustaining solutions

• Using these principles, businesses can have a greater impact on social good than any other institution or philanthropic organization

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